UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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Commission file number 1-3779
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SAN DIEGO GAS & ELECTRIC COMPANY
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(Exact name of registrant as specified in its charter)
California 95-1184800
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8326 Century Park Court, San Diego, California 92123
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(Address of principal executive offices)
(Zip Code)
(619) 696-2000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Common stock outstanding: Wholly owned by Enova Corporation
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
Dollars in millions
<CAPTION>
Three months ended
March 31,
-----------------
2000 1999
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<S> <C> <C>
Operating Revenues
Electric $ 349 $ 360
Natural gas 122 101
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Total 471 461
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Expenses
Electric fuel and net purchased power 133 101
Natural gas purchased for resale 47 47
Operation and maintenance 93 107
Depreciation and decommissioning 52 67
Other taxes and franchise payments 17 21
Income taxes 47 47
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Total 389 390
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Operating Income 82 71
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Other Income and (Deductions)
Allowance for equity funds used
during construction 1 1
Interest income 14 5
Regulatory interest (2) (1)
Taxes on nonoperating income (6) (7)
Other - net (1) 13
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Total 6 11
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Income Before Interest Charges 88 82
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Interest Charges
Long-term debt 21 23
Other 13 4
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Total 34 27
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Net Income 54 55
Preferred Dividend Requirements 2 2
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Earnings Applicable to Common Shares $ 52 $ 53
======= ======
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in millions
<CAPTION>
Balance at
--------------------------
March 31, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Utility plant - at original cost $4,564 $4,483
Accumulated depreciation and decommissioning (2,365) (2,326)
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Utility plant - net 2,199 2,157
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Nuclear decommissioning trust 545 551
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Current assets
Cash and temporary investments 356 337
Accounts receivable 192 192
Due from affiliates 165 152
Income taxes receivable 42 87
Inventories 42 61
Other 11 14
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Total current assets 808 843
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Loan to parent 303 422
Deferred taxes recoverable in rates 105 114
Regulatory assets 222 233
Deferred charges and other assets 47 46
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Total $4,229 $4,366
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See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Dollars in millions
<CAPTION>
Balance at
--------------------------
March 31, December 31,
2000 1999
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<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 857 $ 857
Retained earnings 311 460
Accumulated other comprehensive income (1) (3)
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Total common equity 1,167 1,314
Preferred stock not subject to mandatory redemption 79 79
Preferred stock subject to mandatory redemption 25 25
Long-term debt 1,402 1,418
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Total capitalization 2,673 2,836
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Current liabilities
Current portion of long-term debt 66 66
Accounts payable 131 159
Deferred income taxes 110 106
Regulatory balancing accounts overcollected - net 241 192
Other 145 153
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Total current liabilities 693 676
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Customer advances for construction 45 44
Deferred income taxes - net 326 327
Deferred investment tax credits 50 51
Deferred credits and other liabilities 442 432
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Contingencies and commitments (Note 2)
Total $4,229 $4,366
====== ======
See notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
SAN DIEGO GAS & ELECTRIC COMPANY AND SUBSIDIARY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in millions
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 54 $ 55
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and decommissioning 52 67
Allowance for equity funds used during construction (1) (1)
Deferred income taxes and investment tax credits 7 (24)
Non-cash rate reduction bond revenue 6 (31)
Other - net (10) --
Net change in other working capital components 73 (7)
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Net cash provided by operating activities 181 59
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (65) (42)
Collections on loan to parent 119 --
Other - net 2 9
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Net cash provided (used) by investing activities 56 (33)
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (202) (102)
Issuances of long-term debt 4 9
Repayment of long-term debt (20) (23)
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Net cash used by financing activities (218) (116)
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Increase (decrease) in Cash and Cash Equivalents 19 (90)
Cash and temporary investments, January 1 337 284
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Cash and temporary investments, March 31 $ 356 $ 194
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments, net of amounts capitalized $ 31 $ 24
====== ======
Income tax payments, net of refunds $ -- $ 70
====== ======
See notes to Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
This Quarterly Report on Form 10-Q is that of San Diego Gas &
Electric Company (SDG&E or the Company), the common stock of which
indirectly is wholly owned by Sempra Energy, a California-based
Fortune 500 energy services company. The financial statements herein
are the Consolidated Financial Statements of SDG&E and its sole
subsidiary, SDG&E Funding LLC.
The accompanying Consolidated Financial Statements have been prepared
in accordance with the interim-period-reporting requirements of Form
10-Q. Results of operations for interim periods are not necessarily
indicative of results for the entire year. In the opinion of
management, the accompanying statements reflect all adjustments
necessary for a fair presentation. These adjustments are only of a
normal recurring nature. Certain changes in classification have been
made to prior presentations to conform to the current financial
statement presentation.
The Company's significant accounting policies are described in the
notes to Consolidated Financial Statements in the Company's 1999
Annual Report. The same accounting policies are followed for interim
reporting purposes.
Information in this Quarterly Report is unaudited and should be read
in conjunction with the Company's 1999 Annual Report.
SDG&E has been accounting for the economic effects of regulation on
utility operations in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71), as described in the notes to
Consolidated Financial Statements in the Company's 1999 Annual
Report. In conformity with generally accepted accounting principles
for regulated enterprises and the policies of the California Public
Utilities Commission (CPUC), SDG&E does not apply SFAS No. 71 to its
generation business, as discussed further in Note 2.
2. MATERIAL CONTINGENCIES
ELECTRIC INDUSTRY RESTRUCTURING -- CALIFORNIA PUBLIC UTILITIES
COMMISSION
In September 1996, the State of California enacted a law
restructuring California's electric utility industry (AB 1890). The
legislation adopted the December 1995 CPUC policy decision
restructuring the industry to stimulate competition and reduce rates.
Beginning on March 31, 1998, customers were given the opportunity to
choose to continue to purchase their electricity from the local
utility under regulated tariffs, to enter into contracts with other
energy-service providers (direct access) or to buy their power from
the independent Power Exchange (PX) that serves as a wholesale power
pool allowing all energy producers to participate competitively. The
PX obtains its power from qualifying facilities, from nuclear units
and, lastly, from the lowest-bidding suppliers. California's
investor-owned utilities (IOUs) are obligated to sell their power
supply, including owned generation and purchased-power contracts, to
the PX. The IOUs are also obligated to purchase from the PX the power
that they distribute. An Independent System Operator (ISO) schedules
power transactions and access to the transmission system. The local
utility continues to provide distribution service regardless of the
source from which the customer chooses to purchase electricity.
Purchases by SDG&E from the PX/ISO are included in purchased-power
expenses and revenues from sales to the PX/ISO have been netted
therein on the Statements of Consolidated Income. Revenues from the
PX/ISO reflect sales to its PX/ISO at market prices of energy from
SDG&E's power plants and from its long-term purchased-power
contracts.
As discussed in the notes to Consolidated Financial Statements
contained in the Company's 1999 Annual Report, AB 1890 allowed the
IOUs a reasonable opportunity to recover their stranded costs via a
competition transition charge (CTC) to customers through December 31,
2001. In June 1999, SDG&E completed the recovery of its stranded
costs, other than the future above-market portion of qualifying
facilities and other purchased-power contracts that were in effect at
December 31, 1995, and San Onofre Nuclear Generating Station (SONGS)
costs as described below, both of which will continue to be collected
in rates. Recovery of the other stranded costs was effected by, among
other things, the sale of SDG&E's South Bay and Encina fossil power
plants and combustion turbines during the quarter ended June 30,
1999. SDG&E will operate and maintain both plants for the new owners
until April 2001 and May 2001, respectively.
Stranded costs included the cost of SONGS as of December 31, 1995.
SDG&E retains ownership of its 20-percent interest in SONGS.
Subsequent SONGS costs are recoverable only from the sales to the PX
of power produced from SONGS, at rates previously fixed by the CPUC
through December 31, 2003 and at market rates thereafter. If approved
by the CPUC, SDG&E is planning to auction its interest in SONGS. A
major issue being addressed is how to handle the decommissioning
trust to ensure that adequate funding is available at the time the
plant is decommissioned.
AB 1890 also required a 10-percent reduction of residential and small
commercial customers' rates, beginning in January 1998, and provided
for the issuance of rate-reduction bonds by an agency of the State of
California to enable the IOUs to achieve this rate reduction. In
December 1997, $658 million of rate-reduction bonds were issued on
SDG&E's behalf at an average interest rate of 6.26 percent. These
bonds are being repaid over 10 years by SDG&E's residential and small
commercial customers via a non-bypassable charge on their electric
bills. In 1997, SDG&E formed a subsidiary, SDG&E Funding LLC, to
facilitate the issuance of the bonds. In exchange for the bond
proceeds, SDG&E sold to SDG&E Funding LLC all of its rights to the
revenue streams collected from such customers related to the non-
bypassable charge. Consequently, the transaction is structured to
cause such revenue streams not to be the property of SDG&E nor to be
available to satisfy any claims of SDG&E's creditors.
The sizes of the rate-reduction bond issuances were set so as to make
the IOUs neutral as to the 10-percent rate reduction, and were based
on a four-year period to recover stranded costs. Because SDG&E
recovered its stranded costs in only 18 months (due to the greater-
than-anticipated plant-sale proceeds), the bond sale proceeds were
greater than needed. Accordingly, SDG&E will return to its customers
over $400 million of surplus bond proceeds. The timing of the return
will differ from the timing of the collection, but the specific
timing of the repayment and the interest rate thereon are the subject
of a CPUC proceeding. This refund will not affect SDG&E's net income,
except to the extent that the interest associated with the refund
differs from the return earned by the Company on the funds to be
refunded. The refund does not affect the bonds and their repayment
schedule.
On March 17, 2000 a proposed decision was issued in this proceeding
which would require SDG&E to refund the surplus bond proceeds over
the remaining life of the bonds at an interest rate of 12.63 percent.
An April 21, 2000 alternate decision would, if adopted, require SDG&E
to refund the surplus bond proceeds over a very short period of time
(the next feasible billing cycle) at the 12.63 percent interest rate.
A final decision regarding this refund is expected in the second
quarter of 2000.
AB 1890 also includes a rate freeze for all IOU customers. Beginning
in 1998, SDG&E's system-average rates were fixed at 9.43 cents per
kwh. The rate freeze was to have stayed in place until January 1,
2002. However, in connection with completion of its stranded cost
recovery, SDG&E filed with the CPUC for a mechanism to structure
electric rates after the end of the rate freeze. SDG&E received
approval to reduce base rates (the non-commodity portion of rates) to
all electric customers, effective July 1, 1999. The portion of the
electric rate representing the commodity cost is passed through to
customers and fluctuates with the price of electricity from the PX.
As a result, although base rates are now below those implicit in the
rate freeze, total rates charged by SDG&E may be above or below those
set by the rate freeze depending on the cost of electricity.
The CPUC is currently deliberating on the legal, ratemaking and
policy issues of ending the rate freeze for all the IOUs, including
post-rate freeze ratemaking. One issue in this proceeding is a joint
proposal by SDG&E and several other parties that would limit SDG&E's
obligation to purchase from the PX to 80 percent of the electricity
required by its utility default customers, and to establish an
electric commodity performance-based regulation (PBR) mechanism,
which would measure SDG&E's effectiveness in procuring electricity on
behalf of its utility default commodity customers and the
administration of its above-market purchased-power contracts. On
March 17, 2000, a proposed decision was issued in this proceeding
which does not adopt the proposed SDG&E electric commodity PBR
mechanism and does not allow reapplication until such time as all
three California IOUs have completed stranded cost recovery. An April
17, 2000 alternate decision also rejects the proposed commodity PBR
mechanism. A final decision on this issue is expected during the
second quarter of 2000.
Thus far, electric-industry restructuring has been confined to
generation. Transmission and distribution have remained subject to
traditional cost-of-service regulation. However, the CPUC is
exploring the possibility of opening up electric distribution to
competition. During 2000, the CPUC will consider whether any changes
should be made in electric distribution regulation. A CPUC staff
report on this issue is expected to be submitted to the CPUC in the
second quarter of 2000. SDG&E and its affiliate, Southern California
Gas Company, will actively participate in this effort and will argue
in support of competition intended to maximize benefits to customers
rather than to protect competitors.
ELECTRIC INDUSTRY RESTRUCTURING -- FEDERAL ENERGY REGULATORY
COMMISSION
On December 20, 1999 the Federal Energy Regulatory Commission (FERC)
issued "Order 2000". As described in the Company's 1999 Annual
Report, the rule discusses the formation of Regional Transmission
Organizations, grid management, transmission pricing reform and
related matters. The impact of Order 2000 on SDG&E depends on the
results of this process and other implementation issues.
Transmission Access Charge
On March 31, 2000 the ISO filed with the FERC a transmission access
charge (TAC) which separates the transmission systems in California
into two groups (high and low voltage) as the basis for allocating
the costs of maintaining the transmission systems among the various
transmission owners. SDG&E voted against the TAC and plans to file a
protest with the FERC during the second quarter of 2000. If the FERC
approves the TAC, Internal Revenue Service regulations may require
SDG&E to refinance the industrial development bonds that support its
transmission and distribution facilities. If this occurs, SDG&E's
estimated annual pretax cost of replacing the bonds with debt, the
interest on which is taxable to the holders, would be approximately
$13 million, most of which would be recovered in rates. A FERC
decision is not expected before 2001.
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry experienced an initial phase of
restructuring during the 1980s by deregulating natural gas sales to
noncore customers. On January 21, 1998, the CPUC released a staff
report initiating a project to assess the current market and
regulatory framework for California's natural gas industry. The
general goals of the plan are to consider reforms to the current
regulatory framework emphasizing market-oriented policies benefiting
California's natural gas consumers.
The CPUC has held hearings throughout the state and intends to give
the legislature a draft ruling before adopting a final market-
structure policy. SDG&E and its affiliate, Southern California Gas
Company, have been actively participating in this effort and have
argued in support of competition intended to maximize benefits to
customers rather than to protect competitors. During this process
various large customers on the California utilities' systems are in
the process of negotiating a restructuring of intrastate transmission
receipt points, balancing policies and storage rights. SDG&E,
SoCalGas and other interested parties are expected to file a
settlement with the CPUC on these matters in the second quarter of
2000 with evidentiary hearings before the CPUC in June 2000. A CPUC
decision is not expected until late 2000.
In October 1999, the State of California enacted a law (AB 1421)
which requires that natural gas utilities provide "bundled basic gas
service" (including transmission, storage, distribution, purchasing,
revenue-cycle services and after-meter services) to all core
customers, unless the customer chooses to purchase natural gas from a
non-utility provider. The law prohibits the CPUC from unbundling
distribution-related natural gas services (including meter reading
and billing) and after-meter services (including leak investigation,
inspecting customer piping and appliances, pilot relighting and
carbon monoxide investigation) for most customers. The objective is
to preserve both customer safety and customer choice.
NUCLEAR INSURANCE
SDG&E and the co-owners of SONGS have purchased primary insurance of
$200 million, the maximum amount available, for public-liability
claims. An additional $9.3 billion of coverage is provided by
secondary financial protection required by the Nuclear Regulatory
Commission and provides for loss sharing among utilities owning
nuclear reactors if a costly accident occurs. SDG&E could be assessed
retrospective premium adjustments of up to $36 million in the event
of a nuclear incident involving any of the licensed, commercial
reactors in the United States, if the amount of the loss exceeds $200
million. In the event these coverages are insufficient, the Price-
Anderson Act provides for Congress to enact further revenue-raising
measures to pay claims, which could include an additional assessment
on all licensed reactor operators.
Insurance coverage is provided for up to $2.8 billion of property
damage and decontamination liability. Coverage is also provided for
the cost of replacement power, which includes indemnity payments for
up to three years and six weeks, after a waiting period of 12 weeks.
Coverage is provided primarily through mutual insurance companies
owned by utilities with nuclear facilities. If losses at any of the
nuclear facilities covered by the risk-sharing arrangements were to
exceed the accumulated funds available from these insurance programs,
SDG&E could be assessed retrospective premium adjustments of up to $5
million.
3. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2000
and March 31, 1999 was $56 million and $55 million, respectively. The
difference between net income and comprehensive income for the three-
month period ended March 31, 2000 was due to minimum pension
liability adjustments. For the three-month period ended March 31,
1999 comprehensive income was equal to earnings applicable to common
shares.
4. SEGMENT INFORMATION
The Company previously had three separately managed reportable
segments: electric transmission and distribution, electric
generation, and natural gas service. Effective with the sale of its
fossil fuel generation facilities and other organizational changes,
the Company no longer operates in multiple business segments.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements contained in this Form 10-Q and Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1999 Annual Report.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that are not
historical fact and constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimates," "believes," "expects," "anticipates," "plans,"
"intends," "may" and "should" or similar expressions, or discussions
of strategy or of plans are intended to identify forward-looking
statements that involve risks, uncertainties and assumptions. Future
results may differ materially from those expressed in the forward-
looking statements.
These statements are necessarily based upon various assumptions
involving judgments with respect to the future and other risks,
including, among others, local, regional, national and international
economic, competitive, political and regulatory conditions and
developments; technological developments; capital market conditions;
inflation rates; interest rates; energy markets, including the timing
and extent of changes in commodity prices; weather conditions;
business, regulatory or legal decisions; the pace of deregulation of
retail natural gas and electricity delivery; the timing and success
of business development efforts; and other uncertainties -- all of
which are difficult to predict and many of which are beyond the
control of the Company. Readers are cautioned not to rely unduly on
any forward-looking statements and are urged to review and consider
carefully the risks, uncertainties and other factors which affect the
Company's business described in this quarterly report and other
reports filed by the Company from time to time with the Securities
and Exchange Commission.
CAPITAL RESOURCES AND LIQUIDITY
The Company's California utility operations continue to be a major
source of liquidity. In addition, working capital requirements are
met through the issuance of short-term and long-term debt. Major
changes in cash flows not described elsewhere are described below.
Cash and cash equivalents at March 31, 2000 are available for
investment in utility plant, the retirement of debt and other
corporate purposes.
CASH FLOWS FROM OPERATING ACTIVITIES
The increase in cash flows from operations is primarily due to
reduced payments on behalf of the parent company and on accounts
payable, offset by reduced overcollections on regulatory balancing
accounts compared to the three-month period ended March 31, 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment are estimated
to be $310 million for the full year 2000 and will be financed
primarily by internally generated funds. Construction, investment and
financing programs are continuously reviewed and revised in response
to changes in competition, customer growth, inflation, customer
rates, the cost of capital, and environmental and regulatory
requirements.
CASH FLOWS FROM FINANCING ACTIVITIES
The increase in net cash used in financing activities was primarily
due to an increase in dividends paid to Sempra Energy during the
three-month period ended March 31, 2000, compared to the
corresponding period in 1999.
RESULTS OF OPERATION
The table below summarizes the components of electric and natural gas
volumes and revenues for SDG&E by customer class for the three-month
periods ended March 31, 2000 and 1999.
<TABLE>
Electric Distribution & Transmission
(Dollars in millions, volumes in millions of Kwhrs)
For the three months ended March 31
<CAPTION>
2000 1999
------------------------------------------
Volumes Revenue Volumes Revenue
------------------------------------------
<S> <C> <C> <C> <C>
Residential 1,680 $ 169 1,685 $ 170
Commercial 1,427 120 1,518 125
Industrial 564 37 489 31
Direct access 879 28 657 21
Street and highway lighting 19 2 19 2
Off-system sales 104 3 26 -
------------------------------------------
4,673 359 4,394 349
Balancing and other (10) 11
------------------------------------------
Total 4,673 $ 349 4,394 $ 360
------------------------------------------
</TABLE>
<TABLE>
Gas Sales, Transportation & Exchange
(Dollars in millions, volumes in billion cubic feet)
For the three months ended March 31
<CAPTION>
Gas Sales Transportation & Exchange Total
--------------------------------------------------------------------
Throughput Revenue Throughput Revenue Throughput Revenue
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000:
Residential 13 $ 95 -- $ -- 13 $ 95
Commercial and industrial 6 34 10 5 16 40
Utility electric generation -- -- 5 2 5 1
--------------------------------------------------------------
19 $ 129 15 $ 7 34 136
Balancing accounts and other (14)
--------
Total $ 122
- -------------------------------------------------------------------------------------------
1999:
Residential 15 $ 105 -- $ -- 15 $ 105
Commercial and industrial 7 34 4 4 11 38
Utility electric generation* 12 5 -- -- 12 5
-------------------------------------------------------------
34 $ 144 4 $ 4 38 $ 148
Balancing accounts and other (47)
---------
Total $ 101
- -------------------------------------------------------------------------------------------
</TABLE>
* margin only
Natural gas revenues increased 21 percent for the three-month
period ended March 31, 2000, compared to the corresponding
period in 1999, primarily due to increased natural gas prices.
Natural gas purchased for resale for the three-month period
ended March 31, 2000 was unchanged from the corresponding period
in 1999. Decreases in volumes were offset by higher prices of
natural gas. Under the current regulatory framework, changes in
core-market natural gas prices do not affect net income.
Depreciation and decommissioning expense decreased 22 percent
for the three-month period ended March 31, 2000, compared to the
corresponding period in 1999, due to the sale of the power
plants and combustion turbines.
Operating income increased 15 percent for the three-month period
ended March 31, 2000 compared to the corresponding period in
1999. The increase is primarily due to the elimination of the
Gas Fixed Cost Adjustment balancing account at the end of 1999
as discussed below.
Net income at SDG&E decreased slightly due to decreased rate base
and authorized rate of return on equity, and increased interest
expense on rate reduction bond refunds (all of which began in mid
1999 and which are related to industry restructuring) offset by
the elimination of the Gas Fixed Cost Adjustment balancing
account at the end of 1999. With the elimination of the balancing
account, SDG&E's net income now fluctuates with changes in
natural gas demand, due to seasonal and other factors. During the
three-month period ended March 31, 2000, this resulted in a $14
million increase in net income. This was based on a timing
difference that likely will reverse later in the year.
FACTORS INFLUENCING FUTURE PERFORMANCE
Performance of the Company in the near future will depend primarily
on the ratemaking and regulatory process, electric and natural gas
industry restructuring, and the changing energy marketplace. These
factors are discussed in this section.
Industry Restructuring
See discussion of industry restructuring in Note 2 of the notes to
Consolidated Financial Statements.
Electric-Generation Assets and Electric Rates
Note 2 of the notes to Consolidated Financial Statements describes
regulatory and legislative actions that affect SDG&E's electric
rates.
Performance-Based Regulation (PBR)
To promote efficient operations and improved productivity and to move
away from reasonableness reviews and disallowances, the CPUC has been
directing utilities to use PBR. PBR has replaced the general rate
case and certain other regulatory proceedings for the California
utilities. Under PBR, regulators require future income potential to
be tied to achieving or exceeding specific performance and
productivity goals, as well as cost reductions, rather than relying
solely on expanding utility plant in a market where a utility already
has a highly developed infrastructure. The utility's PBR mechanism is
scheduled to be updated at December 31, 2002, to reflect, among other
things, changes in costs and volumes.
Key elements of the mechanisms include an initial reduction in base
rates, an indexing mechanism that limits future rate increases to the
inflation rate less a productivity factor, a sharing mechanism with
customers if earnings exceed the authorized rate of return on rate
base, and rate refunds to customers if service quality deteriorates
or awards if service quality exceeds set standards. Specifically, the
key elements of the mechanisms include the following:
- -- Earnings up to 25 basis points in excess of the authorized rate of
return on rate base are retained 100 percent by shareholders.
Earnings that exceed the authorized rate of return on rate base by
greater than 25 basis points are shared between customers and
shareholders on a sliding scale that begins with 75 percent of the
additional earnings being given back to customers and declining to 0
percent as earned returns approach 300 basis points above authorized
amounts. There is no sharing if actual earnings fall below the
authorized rate of return. In 1999, SDG&E was authorized to earn 9.05
percent on rate base. For 2000, the authorized return is 8.75 percent
for SDG&E.
- -- Base rates are indexed based on inflation less an estimated
productivity factor.
- -- SDG&E would be authorized to earn or be penalized up to a maximum
of $14.5 million annually as a result of its performance related to
employee safety, electric reliability, customer satisfaction, and
call-center responsiveness.
- -- Annual cost of capital proceedings are replaced by an automatic
adjustment mechanism. If changes in certain indices exceed
established tolerances, there would be an automatic adjustment of
rates for the change in the cost of capital according to a formula
which applies a percentage of the change to various capital
components.
Cost of Capital
Electric-industry restructuring has changed the method of calculating
the utility's annual cost of capital. In June 1999, the CPUC adopted
a 10.6 percent return on common equity and an 8.75 percent return on
rate base for SDG&E's electric-distribution and natural gas
businesses. The electric-transmission cost of capital is determined
under a separate FERC proceeding.
Biennial Cost Allocation Proceeding (BCAP)
The BCAP determines how a utility's natural gas transportation costs
are allocated among various customer classes (residential,
commercial, industrial, etc.). In October 1998, the California
utilities filed 1999 BCAP applications requesting that new rates
become effective August 1, 1999, and remain in effect through
December 31, 2002. On April 20, 2000, the CPUC issued a decision
adopting overall decreases in natural gas revenues of $37 million for
SDG&E. The decrease has no effect on net income.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities." As
amended, SFAS 133, which is effective for the company on January
1, 2001, requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position, measure those instruments at fair value and recognize
changes in the fair value of derivatives in earnings in the period
of change unless the derivative qualifies as an effective hedge
that offsets certain exposures. The effect of this standard on the
company's Consolidated Financial Statements has not yet been
determined.
ITEM 3. MARKET RISK
There have been no significant changes in the risk issues affecting
the Company subsequent to those discussed in the Annual Report on
Form 10-K for 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary are party to, nor is their
property the subject of, any material pending legal proceedings other
than routine litigation incidental to their businesses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Computation of ratios
12.1 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedules
27.1 Financial Data Schedule for the three-month period ended
March 31, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed after December 31, 1999.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934,
SDG&E has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAN DIEGO GAS & ELECTRIC COMPANY
(Registrant)
Date: May 3, 2000 By: /s/ E.A. Guiles
-----------------------------
E.A. Guiles
President
<TABLE>
EXHIBIT 12.1
SAN DIEGO GAS & ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Dollars in millions)
<CAPTION> For the three
months ended
March 31,
1995 1996 1997 1998 1999 2000
--------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges and Preferred
Stock Dividends:
Interest:
Long-Term Debt $ 82 $ 76 $ 69 $ 55 $ 49 $12
Rate Reduction Bonds -- -- -- 41 35 8
Short-Term Debt & Other 18 13 14 14 40 17
Amortization of Debt
Discount and Expense,
Less Premium 5 5 5 8 7 1
Interest Portion of
Annual Rentals 10 8 10 7 5 1
--------- -------- -------- ------- --------- ----------
Total Fixed
Charges 115 102 98 125 136 39
--------- -------- -------- -------- --------- ----------
Preferred Dividends
for Purpose of Ratio (1) 14 13 13 11 10 3
--------- -------- -------- -------- --------- ----------
Total Fixed Charges
and Preferred Stock
Dividends For
Purpose of Ratio $129 $115 $111 $136 $146 $42
========== ======== ======== ======== ========= ==========
Earnings:
Net Income (before
preferred dividend
requirements) $219 $222 $238 $191 $199 $54
Add:
Fixed charges
(from above) 115 102 98 125 136 39
Less: Fixed charges
capitalized 2 1 2 1 1 -
Taxes on Income 173 198 219 141 126 53
--------- - ------- -------- --------- --------- ----------
Total Earnings for
Purpose of Ratio $505 $521 $553 $456 $460 $146
========= ======== ======== ======== ========= ==========
Ratio of Earnings
to Combined Fixed
Charges and Preferred
Stock Dividends 3.92 4.54 5.00 3.36 3.15 3.48
========= ======== ======== ======== ========= ==========
(1) In computing this ratio, "Preferred dividends" represents the before-tax earnings necessary
to pay such dividends, computed at the effective tax rates for the applicable periods.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED STATEMENT OF CONSOLIDATED INCOME,
BALANCE SHEET AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<CIK> 0000086521
<NAME> SAN DIEGO GAS & ELECTRIC COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,199
<OTHER-PROPERTY-AND-INVEST> 545
<TOTAL-CURRENT-ASSETS> 808
<TOTAL-DEFERRED-CHARGES> 365
<OTHER-ASSETS> 312
<TOTAL-ASSETS> 4,229
<COMMON> 291
<CAPITAL-SURPLUS-PAID-IN> 566
<RETAINED-EARNINGS> 311
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,167
25
79
<LONG-TERM-DEBT-NET> 1,381
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 66
0
<CAPITAL-LEASE-OBLIGATIONS> 21
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,490
<TOT-CAPITALIZATION-AND-LIAB> 4,229
<GROSS-OPERATING-REVENUE> 471
<INCOME-TAX-EXPENSE> 47
<OTHER-OPERATING-EXPENSES> 342
<TOTAL-OPERATING-EXPENSES> 389
<OPERATING-INCOME-LOSS> 82
<OTHER-INCOME-NET> 6
<INCOME-BEFORE-INTEREST-EXPEN> 88
<TOTAL-INTEREST-EXPENSE> 34
<NET-INCOME> 54
2
<EARNINGS-AVAILABLE-FOR-COMM> 52
<COMMON-STOCK-DIVIDENDS> 200
<TOTAL-INTEREST-ON-BONDS> 21
<CASH-FLOW-OPERATIONS> 181
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
